Credit cards and other or other payment instruments, such as debit cards, check cards, and automatic teller machine (ATM) cards, are widely used by holders to purchase goods and services in the marketplace and to obtain access to funds and information. It is projected that at least 35% of all U.S. cardholder payments in 2007 will be made via “plastic” (i.e., a credit or debit card), and it is estimated that this rate will increase to at least 49% by 2010. The current annual value of these transactions exceeds 400 billion dollars. While credit card transactions are convenient for cardholders, they present a special set of problems for merchants and credit card issuers. One such problem occurs when a cardholder disputes a credit card transaction, resulting in a “chargeback” to the merchant with whom the transaction was made.
To understand the problem presented by chargebacks, a brief overview of the economics behind credit cards is required. Credit cards are provided to a cardholder by an issuing bank. When a cardholder enters into a transaction with a merchant using the credit card, the issuing bank commits to pay the merchant at the time the transaction is verified. For in person transactions, verification occurs through the magnetic strip on the back of the credit card, and for transactions where the physical card is not present by software driven systems, such as “Verified by Visa,” which compare information received during the transaction to the user's account information. In return for providing credit card service to a merchant, the issuing bank charges the merchant a commission, called a discount fee, on each completed credit card transaction.
Each month, the credit card user is sent a statement documenting the purchases made with the card, and the total balance owed. According to the Fair Credit Billing Act the cardholder can dispute any charges on the statement that he or she thinks are incorrect. A chargeback occurs when a credit card holder contacts the issuing bank and disputes a purchase that the cardholder made on his/her credit card. The reasons why chargebacks occur vary, but most are due to a defective product, fraud, or the cancellation of an automatic recurrent payment. The cardholder may or may not have contacted the merchant about remedying the situation before contacting the issuing bank.
The chargeback process varies somewhat from credit card company to credit card company, but generally follows the sequence shown in FIG. 1. At step 1, a credit card holder disputes a transaction with their issuing bank. At step 2, the issuing bank investigates to determine whether the chargeback request is valid, and if it is not, denies the chargeback. At step 3, a provisional credit representing the amount charged is placed back in the user's account. At step 4, the issuing bank initiates a chargeback process and obtains credit representing the chargeback purchase from the merchant's bank. At step 5, the merchant's bank investigates the chargeback request to determine if it is valid, and, if not, the chargeback is returned to the issuing bank. If the merchant's bank determines the chargeback is valid, at step 6, the chargeback amount is removed from the merchant's bank account, and the merchant's bank provides written notice to the merchant. At step 7, the merchant is given an opportunity to refute the chargeback, and, if its documentation is satisfactory, the chargeback is declined and the cardholder is once again charged for the sale. If the chargeback is not declined, the chargeback is successful and the process is completed.
Merchants seek to reduce the number of chargebacks as much as possible because each chargeback results in losses to the merchant in the form of lost profit for refunded sales, shipping and handling fees, and the loss of productivity attributed to handling the disputes. Clearly the chargeback process is also expensive for the banks. Therefore, the frequency of chargebacks affects the amount of the commission charged by credit card issuers for each credit card transaction. If a merchant has a high frequency of chargebacks, the commission charged by a credit card issuer increases. If the frequency of chargebacks reaches certain level, such as more than 1% of total sales, the credit card issuer may completely terminate the merchant's account. In such an instance, the merchant is added to a Terminated Merchant File (also called the Match File) that effectively prevents the merchant from being allowed to accept credit cards as a form of payment. Needless to say this can be very deleterious to the merchant's business.
While completely preventing chargebacks is impossible, there are several ways to decrease the frequency of chargebacks, including: credit card verification/authentication services; reliable product delivery, responsive cardholder service, institution of dispute and refund procedures, and risk assessment of potential cardholders. The current invention seeks to reduce the frequency of chargebacks by improving a merchant's verification and authentication capabilities.